“Lira de­pre­ci­a­tion will af­fect Turk­ish banks’ as­set qual­ity. About 30% of sys­tem-wide loans are for­eign­cur­rency de­nom­i­nated, so the cur­rency’s decline in value will re­sult in ris­ing loan re­pay­ments on th­ese loans, and this is likely to re­sult in in­creased delin­quen­cies. We ex­pect that this fac­tor will con­trib­ute to an in­crease in the sys­tem-wide NPL ra­tio to around 3.5%-4.0% dur­ing 2015, from 2.8% at year-end 2014” ex­plained Irakli Pipia, a Moody’s Se­nior An­a­lyst.

The Moody’s re­port also said that the growth of RWAs will put pres­sure on cap­i­tal­i­sa­tion, such that the lira equiv­a­lent risk weight of for­eign-cur­rency loans will in­crease rel­a­tive to Core Tier 1 cap­i­tal that is mostly held in lira, so the de­pre­ci­a­tion could pres­sure Core Tier 1 lev­els. Ac­cord­ing to Moody’s es­ti­mates, a 5% de­pre­ci­a­tion of the lira ver­sus the US dollar low­ers Core Tier 1 cap­i­tal by ap­prox­i­mately 15 ba­sis points (bps). Depend­ing on the bank, the im­pact varies be­tween 5-25 bps (up to 1.6% of Core Tier 1).

“As a re­sult of wors­en­ing trends and high de­pen­dence on ex­ter­nal whole­sale fund­ing the risk pre­mi­ums that Turk­ish is­suers must pay on their ex­ter­nal bor­row­ing over the com­ing 12-18 months could in­crease, although some lead­ing banks have com­fort­able liq­uid­ity re­sources to weather the pres­sure” said Pipia.

The rat­ing agency re­port noted that the pres­sures on the banks will not be uni­form in terms of re­fi­nanc­ing needs. How­ever, de­spite the un­even pres­sure on in­di­vid­ual banks, the sys­tem-wide trends are ex­pected to be neg­a­tive and con­trib­ute to chal­leng­ing op­er­at­ing en­vi­ron­ment which Moody’s ex­pects will pre­vail in the Turk­ish bank­ing sys­tem for the rest of 2015.

The fund­ing struc­ture of this sys­tem and its in­her­ent vul­ner­a­bil­i­ties to volatile in­vestor sen­ti­ment will re­main a con­tribut­ing fac­tor in­form­ing the neg­a­tive out­look cur­rently as­signed to the ma­jor­ity of Moody’s bank rat­ings in Turkey.